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Cite as: [2004] IEHC 124
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HC 253/04
THE HIGH COURT
[2004 No. 216 COS]
IN THE MATTER OF HAYES HOMES LIMITED
(IN VOLUNTARY LIQUIDATION) AND
IN THE MATTER OF THE COMPANIES ACTS 1963 – 2001 AND
IN THE MATTER OF THE PETITION OF LIAM J. IRWIN COLLECTOR GENERAL AND OFFICER OF THE REVENUE COMMISSION
JUDGMENT of O'Neill J. delivered on the 8th day of July, 2004.
The petitioner in his petition seeks an order that Hayes Homes Limited (herein after referred to as the company) be compulsorily wound up by the court under the provisions of the Companies Act, or in the alternative an order setting aside a nomination of Tony Fitzpatrick to act as liquidator.
BACKGROUND The company is indebted to the petitioner in the sum of €264,456 approx. This sum was claimed in a letter of demand dated 22nd March, 2004, a demand served in accordance with the provisions of s. 214 of the Companies Acts, 1963 – 2001. The company failed to pay the sum demanded. The company had engaged in the business of running a nursing home and the company ceased trading on 28th February, 2003 with an accumulated deficit in its accounts amounting to €264,561. The debt due to the petitioner represented in excess of 90% of the total indebtedness of the company. On 4th May, 2004 at a meeting of the members of the company, it was resolved that the company be wound up voluntarily. On the same day at 4 pm in the afternoon a meeting of the creditors of the company took place at the Abbey Court Hotel Dublin Road Nenagh in the County of Tipperary. The petitioner sent a proxy to that meeting, Mr. Philip Maloney and he was accompanied by Mr. Barry Forest an accountant whom the petitioner proposed to nominate as liquidator. On 26th April, 2004 the petitioner had executed a proxy form and this was posted on the same date to the registered office of the company. The meeting of the creditors of the company was chaired by Austin Power who was a director and shareholder of the company. He submitted a statement of affairs to the meeting disclosing a deficit of €264,561. Of the remaining debt, apart from that due to the petitioner, a considerable portion of it was due to connected companies. Thus the petitioners proxy at the creditors meeting approached the matter on the basis that the petitioner being the holder of an excess of 90% of indebtedness of the company was entitled to avail of s. 267 (3) of the Companies Act as amended which reads as follows:
"(3) if at a meeting of creditors mentioned in s. 266 (1) a resolution as to the creditors nominee or liquidator is proposed, it shall be deemed to be passed when a majority, in value only, of the creditor's present personally or by proxy and voting on the resolution have voted in favour of the resolution."
When the time came for the meeting to vote on a resolution to appoint the nominee of the petitioner as liquidator namely Mr. Barry Forrest, an issue arose as to whether or not the form of proxy had been properly executed or transmitted to the registered office of the company. The chairman of the meeting Mr. Austin Power was unaware of the existence of or the facts that any such proxy form had been sent to the registered office of the company. He, the chairman, than adjourned the meeting so that he could make inquiries of the landlord of the office of the registered office of the company to ascertain whether or not the proxy form had arrived in the post and having made those inquiries he informed the meeting that no such proxy form had arrived at the registered office of the company. Notwithstanding this Mr. Maloney continued to assert his right to participate in the meeting and to vote as the legitimate proxy of the petitioner, highlighting the position of the petitioner as the largest creditor and asserting that this was sufficient to secure the appointment of the petitioner's nominee. This resulted in a second adjournment of the meeting to enable the chairman Mr. Power to seek legal advice from his solicitor relating to the validly of the position of the petitioner. Mr. Power telephoned his solicitor Mr. O'Connor and having outlined the position to him, was advised that, as the petitioners proxy had not been lodged in the registered office in time and had still not been lodged at the time of the meeting, that a petitioner was not entitled to vote for their nominee as liquidater, and to accept the nomination of the petitioners nominee on foot of the petitioners proxy would have led to a situation whereby the appointment of Mr. Forest as liquidator could be deemed to be invalid. There then ensued considerable discussion, including an assertion by an assistant of Mr. Forest that Order 74 Rule 71 of the Rules of the Superior Court obliged the chairman of the meeting to accept the vote, noting his objection to it, and the vote being accepted subject to being deemed invalid by the High Court upon an application in that behalf been taken within fourteen days. Mr. Power clearly rejected that assertion and on the basis of the legal advice which he had obtained, and excluded Mr. Maloney from voting and as a consequence the appointment of Mr. Fitzpatrick as liquidator was confirmed.
In these proceedings the petitioner submits that Mr. Power was in error in excluding Mr. Maloney from voting on the grounds of the alleged non receipt in the companies registered office of the proxy form, he Mr. Maloney having brought to the meeting a duplicate of the proxy form together with a duplicate or copy of the envelope in which it was sent. It was further submitted that all that was required to entitle the petitioners represented by Mr. Maloney to participate in the vote as proxy of the petitioner was proof of the petitioners debt, which in fact was not in dispute, and was indeed listed as one of the debts of the company in the statement of affairs presented to the meeting by Mr. Power. It was further submitted that even if Mr. Power was correct in excluding Mr. Maloney from the vote, that having regard to the fact that the petitioner had a clear statutory entitlement under s. 267 (3) of the Companies Act, 1963 as amended, to nominate a liquidator, having regard to the size of its debt, that this court should exercise its discretion to direct compulsorily winding up because of the suspicious nature of the circumstances in which the business of the company appears to have been promptly restarted, in the same premises, with the same employees, and with no trade debt, but having shed the very substantial due to the petitioner. In this regard the petitioner relies upon the persuasive authority of two English cases namely re: Parma Surveys Limited [1986] BCLC 106 and the case of re: Falcon RJ Developments Limited [1987] BCLC 437.00. On behalf of Mr. Power it was submitted that his decision to exclude the vote of Mr. Maloney at the meeting on 4th May, 2004 was correct having regard to the provisions of Order 74 and a particular Order 74 Rule 82. In this regard it was submitted, that it had to be borne in mind, that Mr. Power was not a lawyer and his function at the time was to chair this meeting and thus a liberal construction of the relevant rules should apply in the knowledge that they must be applied by lay persons in circumstances very different from a court of law, where the point can be fully argued. It was further submitted that there were no circumstances present in this case which would warrant the interruption of the voluntary liquidation and the substitution of a compulsory liquidation, given that there was no challenge at all, to the competence or probity of Mr. Fitzpatrick, and no evidence whatsoever of any impropriety or irregularity in the conduct of the affairs of the company or in the conduct of the liquidation to date and that such concerns as were expressed by the petitioner, which were not untypical of concerns that frequently arise, in all voluntarily liquidations are properly catered for in one or other of two respects; in the first instance by the proper discharge by Mr. Fitzpatrick of his duties as liquidator and in that regard he refers to Mr. Fitzpatrick's affidavit and report, wherein he avers his intention to pursue all appropriate courses of action and remedies in regard to any matters that come to his attention; and secondly counsel for Mr. Power points to s. 280 of the Companies Act 1963 as amended, which reads as follows:
"280 (1) of the liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise in relation to the enforcing of calls or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court…"
It was submitted that the petitioner could more appropriately through this remedy pursue their stated intention of seeking to have the veil of incorporation lifted so as to render Mr. Power personally liable for the debt due to them, in the event of there being evidence to support such a claim. It was submitted that having regard to the complete absence of evidence of any wrongdoing that there were no grounds at this stage on which the courts should exercise its discretion to displace the voluntary liquidation and replace it with the compulsory winding up and in this regard reliance was placed on the following cases; In the matter of Guilt Construction Limited [1994] 2 I.L.R.M. 456 and In the matter of Eurochick (Ireland) Limited (Unreported judgment of McCracken J. delivered the 23rd day of March, 1998, and In the matter of Naiad Limited (Unreported judgment of McCracken J. delivered the 13th day of February, 1995). The petitioner for the purposes of this petition has offered to the court an undertaking to discharge the costs and expenses of the voluntary liquidation to date and to discharge all future expenses incurred in the litigation, if the court is disposed to direct a compulsory winding up as sought in the petition.
DECISION The first issue to be confronted in the case is whether or not Mr. Power was correct to have excluded Mr. Maloney from voting at the meeting of creditors on 4th May, 2004. The relevant provisions of Order 74 are as follows:
"56. Except where and insofar as the nature of the subject matter of the context may otherwise require, rules 58 – 83 (inclusive) shall apply to a court meeting of creditors and to a court meeting of contributories, to a liquidators meeting of creditors and to a liquidators meeting of contributories, and to a voluntary liquidation meeting…
Creditors entitled to vote.
67. In the case of a meeting of creditors held pursuant to s. 232 or of an adjournment thereof a person shall not be entitled to vote as a creditor unless he has duly lodged with the liquidator not later than the time mentioned for that purpose in the notice convening the meeting or adjourned meeting, a proof of the debt which he claims to be due to him from the company. In the case of any other Court meeting of creditors or a liquidators meeting of creditors, a person shall not be entitled to vote as a creditor unless he has lodged with the liquidator a proof of the debt which he claims be due to him from the company and such proof has been admitted wholly or in part before the date on which the meeting is held; provided that the next four following rules shall not apply to a meeting of creditors held pursuant to s. 232. This rule shall not apply to any creditors or class of creditors who by virtue of the act or this order are not required to prove their debts or to any involuntary liquidation meeting…. Admission and rejection of proofs for the purposes of voting.
71. The chairman shall have power to admit or reject proof for the purposes of voting, but his decision shall be subject to appeal to the court. If he is in doubt whether a proof should be admitted or rejected he shall mark it as objected to allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained…. Proxies
74. A creditor or a contributor, may vote either in person or by proxy. Where a person is authorised in the manner provided by s. 139 to represent a corporation at any meeting of creditors or contributories, such a person shall produce to the liquidator or other chairman of the meeting, a copy of the resolution so authorising him. Such copy shall either be under the seal of the corporations or the certified to be a true copy to the secretary or a director of the corporation….
82. (1) Every instrument of proxy shall be lodged with the official liquidator in a winding up by the court, with the company at its registered office for a meeting under s. 266, and with a liquidator or if there is no liquidator with the person named on the notice convening the meeting to receive the same in a voluntary winding up, not later than 4.00 pm in the afternoon of the day before the meeting or adjourned meeting at which it is to be used…"
Much attention was focused on Order 74 Rule 67 as quoted above and reliance was placed upon this by counsel for the petitioner to submit, that what was required to be proved was the debt, to be entitled to vote. It was submitted that this rule applied because of the provisions of Rule 56. Reading these rules in a literal way could easily lead to a conclusion particularly having regard to the last sentence of Rule 67 that proof of debt was not a requirement at a meeting convened under s. 266 of the Companies Act 1963 as amended. However such a construction would appear to me to lead to a strange and anomalous result. Clearly at a meeting of creditors by definition, the primary entitlement to be there and to participate, is being a creditor. Hence unless the debt is already admitted, proof of the debt would necessarily be required to entitle the person to participate in the meeting and in particular vote on a resolution to appoint a liquidator. I am satisfied therefore that Order 74 Rule 67 must apply in these circumstances. In this case the petitioner's debt was admitted and was listed amongst the debt set out in the Statement of Affairs. There was no dispute whatsoever as to the identity or credentials of Mr. Maloney and hence prima facia and subject to the provisions of the rules in relation to proxies, he was entitled to participate in the meeting and to vote on a resolution to appoint a liquidator. Having regard to the size of the company's debt to the petitioner, under s. 267 (3) Mr. Maloney's vote would have been decisive in appointing a liquidator. The question then arises is whether or not the failure to have lodged the instrument of proxy pursuant to Order 74 Rule 82 (1) had the effect of disenfranchising Mr. Maloney. I am satisfied on the evidence that for whatever reasons the instrument of proxy did not arrive at the registered office of the company in time. I am satisfied as a matter of probability that the instrument of proxy was sent by ordinary prepaid post and not by registered post and that as of a time of the holding of the meeting had not arrived in the registered office. Order 74 Rule 82 (1) is expressed in mandatory term. Were I to conclude that mere proof of debt, where that debt is not admitted and proof of identity was sufficient to entitle a proxy to vote that would appear to me, to have the effect of rendering Rule 82 (1) nugatory or superfluous. I am therefore driven to the conclusion that compliance with Order 74 Rule 82 (1) is required before a proxy is entitled to participate in a vote on a resolution to appoint a liquidator notwithstanding that the debt was either proven or admitted. Hence in my view Mr. Power was correct in excluding Mr. Maloney from voting on the resolution to appoint a liquidator. That of course does not end the matter. There remains an issue of great substance as to whether or not the court should exercise its discretion to replace the voluntary winding up with a winding up under the direction of the court. The appropriate principles governing the exercise of such a discretion have been touched upon and discussed in the cases relied upon by both parties. From these cases it is suggested that a different approach is exemplified in the English cases to that which has been prevalent in the decisions of the High Court in this jurisdiction.
The following passage from the judgment of Hoffmann J. as he then was, in the case of Re: Palmer Marine Services Limited [1986] B.C.L.C., illustrates the approach taken in the English cases and it is as follows:
"Besides counting debts, I think I am entitled to have regard to the general principles of fairness and commercial morality which underline the details of the insolvency laws applied to companies. A judicial exercise of discretion should not leave substantial independent creditors with a strong and legitimate sense of grievance. In my judgment the continuation of the voluntary winding up would leave the petitioning creditor with a justifiable feeling of unfair treatment in two respects. First, whatever may have been the technical position under the winding up rules, the petitioning creditor was entitled to be aggrieved at its exclusion from the creditor's meeting on 29th January. It is no answer that the result of the vote would have been the same even if all the excluded creditors had been admitted. As a creditor which stood to loose a very large sum of money, McKees were in fairness entitled at least to be heard and to ask questions. Second, in a case in which there is evidence to suggest that assets have been transferred for inadequate value to an associated company, the independent trade creditors should ordinarily be entitled to have the company's affairs investigated by a liquidator who is not merely independent but can be seen to be independent. The public is frequently astonished by the ease with which unsuccessful business men appear to be able to transfer the assets, good will, premises and employees of an insolvement company to a pristine entity with which they continue trading as before, leaving the creditors unpaid. This may be the prize which has to be paid for the entrepreneurial incentives of limited liability. But in cases in which it appears to have happened, through investigation is required. Disappointed creditors are bound to view with cynicism any investigation undertaken by a liquidator chosen by the very persons whose conduct is under suspicion. There is no criticism in this case of the integrity or competence of Mr. Smith. But the fact that he was chosen by Mr. Davies and that Mr. Davies has gone to great lengths to maintain him in office, is itself enough to disqualify himself in the eyes of the petitioning and supporting creditors. Although this involves no reflection on Mr. Smith, I do not think that the creditor's attitude can be simply rejected as irrational. It is something the court takes into account…."
A similar approach was taken by Vinelott J. in the case of Re: Falcon RJ Developments [1987] B.C.L.C. The following passages from the judgments of McCracken J. in the cases of In the Matter of Eurochick (Ireland) Limited referred to above and in the case of In the matter of Naiad Limited demonstrate a different approach. The following passage is taken from the Judgment in the Eurochick case.
"A number of English cases had been cited to me which are put forward to establish a principle, that, while the making of the winding up of order in these circumstances is discretionary, the order should be made if the creditors has otherwise a legitimate sense of grievance or put another way, that justice must not only be done but must be seen to be done. See for example Re: Magnus Consultants Limited [1995] 1 B.C.L.C. 23 and Re: Falcon RJ Developments Limited [1987] B.C.L.C. 437…
Such a principle certainly appears to run through these cases though I am not sure that it is supported by any case in this jurisdiction. However those cases are based on circumstances where it can be shown that there is some wrongdoing by the company itself which needs to be investigated, and perhaps can be shown at the directors of the company were removing asserts form the company before the winding up. There is nothing of that nature in the present case. What the petitioner really is complaining about is the conduct of its own affairs by its own management, and by extension of the conduct of the relationship between the petitioner and the company by its common manager. Any wrongdoing by the management appears to be wrongdoing in their capacity as the management of the petitioner, in that they may have used funds of the petitioner to support the company, but there is no suggestion that they benefited personally in any way, or that they were guilty of any act which would reduce the assets of the company or increase its liability to its creditors or to the petitioner…..
The only Irish cases cited to me are the judgment of O'Hanlon J. In the matter of Gilt Construction Limited [1994] 2 I.L.R.M. 465 and my own unreported judgment on 13th February, 1995, in the matter of Naiad Limited. In the latter case I quoted with approval from the judgment of O'Hanlon at page 458 of the report and I can do no better than to quote it again now. He said:
'The general approach taken in these cases is to have due regard to the cost involved in winding up by the courts and the delays which will be incurred, to the overall value of the assets to be administered and the complexity or simplicity of the task facing the liquidator, as well as to other relevant factors., such as those raised by the petition on the present case, having to do with questions of mala fides on the part of the person or persons involved'."
In the Naiad case McCracken J. inter alia said the following:
"(4)k It is alleged that the company had been trading insolently and there might be some personal liability on the directors or other officers of the company. The implication is that a liquidator appointed by creditors might not be so diligent in taking action against officers of the company as would a liquidator appointed by the court, and there may be indeed some reality in this submission. However it is a submission which would apply to every voluntary creditors winding up, and the petition very fairly, has made it quite clear at the outset of this application that he is making no allegation whatsoever against the independence capacity of Mr. O'Riordan."
Further on in his judgment in that case McCracken J. says:-
"In M.C.H. Services Limited [1987] BCLC 535, it was held that the court should stop a voluntary winding up where the creditors would have a "justifiable sense of grievance." It was also made quite clear in this case that it was a matter of discretion for the court depending on the particular circumstances of any one case. In the present case, the petitioner would certainly appear to have a sense of grievance, which I suspect may at least partially arise from the fact that it is a United Kingdom company, and may be somewhat suspicious of a local accountant being appointed voluntary liquidator. However as they have made it clear they are not making any personal allegations against Mr. Riordan, I find it hard to think that their sense of grievance really is justifiable."
I do not see in these cases any significant divergence in principle in the approach to be adopted to the question that arises here namely whether to replace a voluntary winding up with a compulsory winding up. What is quite clear is that the court has a discretion and it must weigh up all the factors relevant to the exercise of that discretion. It can of course be fairly said that in the English case in circumstances where a liquidation was in the hands of the nominee of those who could be said to be responsible for the insolvency and where there was some evidence of asset transfers prior to winding up, at an undervalue to associated companies, that decisive weight was attached to the justifiable sense of grievance of a so called outside or independent creditors who stood to lose considerable amounts of money. In the Irish cases referred to, the evidence supporting the petitions did not appear to establish circumstances of that kind and hence given that there was no dispute as to the independence and capacity of the liquidators chosen, the sense of grievance of the petitioners in those cases was clearly discounted. In my view this court should be disposed to intervene if the circumstances deposed to on affidavit show, that assets of the company, such as the good will of its business, have gone to an associated company without any payment and the liquidation is in the hands of the nominee of the person or persons who had control over the company and the connected or associated companies, and where the nominee of the majority creditors who stand to lose substantial monies has been rejected. In this case there is the undoubted fact that the petitioner turned up to the meeting on 4th May, 2004 prepared to secure the appointment of its nominee Mr. Forest as the liquidator. There is also the undoubted fact that under the provisions of s. 267 (3) of the Companies Act, 1963 as amended, the petitioner would have been successful in getting its nominee appointed having regard to the size of its debt. This did not happen because of the mishap of failing to have lodged the instrument of proxy at the registered office of the company in time. In my view the clear entitlement of the petitioner to have appointed his nominee and the petitioner's undoubted intent to have secured the appointment of its nominee are factors to which considerable weight must be attached.
Although the evidence in the affidavit falls short of demonstrating wrongdoing on the part of Mr. Power or any other officer of the company in the pre winding up stage there can be no doubt but that the petitioner would undoubtedly have a strong sense of suspicion and grievance, arising from the fact that the petitioner is the only party to whom any substantial debt was owed by the company and also the fact that the only potentially realisable asset of the company i.e. its good will, would appear to have transferred to an associated company without any recompense. It may of course be the case having regard to the trading of the company which had resulted in a substantial loss, and the market conditions prevailing in the market in which it is operated that the good will might have had little realisable value. That is beside the point, which is, that from the point of view of the petition this aspect of the affairs of the company create justifiable suspicion and would require rigorous investigation. Another factor to which I attach a great deal of weight is the undertaking given to the court by the petitioner to discharge the costs and expenses of the voluntary liquidation to date and to discharge all future costs and expenses to be incurred in a compulsory winding up. Having regard to the potential assets of the company it would appear to me, that this is a considerable boon to the company, because it will preserve the assets form depletion by the costs and expenses of liquidation. On the other side of the scale, there is the fact that there is no dispute whatsoever as to the independence and capacity of Mr. Fitzpatrick to carry out the liquidation and to do all things necessary and appropriate that might arise in the course of that liquidation. Also it can fairly be said, that the stated objective of the petitioner to investigate, and if the facts disclosed warrant it, to bring a claim for a determination that Mr. Power and perhaps others had conducted the affairs of the company in a fraudulent or reckless manner with the consequence of they being held personally liable for the petitioners debt pursuant to s. 297 of the Companies Act, 1963 as amended; can be pursued not just in a compulsory winding up by a liquidator nominated by them, but could also be pursued by them directly as a creditor under the provisions of s. 280 of the Act. Bearing the foregoing factors in mind, and also bearing in mind the fact that the petitioner has moved with considerable expedition so that delay as a result of the replacement with a compulsory winding up is not a significant factor in the completion of the winding up of the company, I have come to the conclusion that I should exercise my discretion in favour of the petitioner. Accordingly I will grant the relief claimed in the petition.